The inner CBD in Christchurch has been under cordon since the February 2011 earthquake, and is not expected to be fully re-opened to the public until April 2012 – more than a year later.
Almost 600 buildings within the CBD have been either demolished or marked for demolition. The effect on businesses in the cordoned off area has been severe.
Businesses were required to relocate to alternative, often less adequate, premises outside the CBD in order to continue keep operating. As there was fierce competition for alternative premises, business owners often made relocation decisions quickly - without clarity as to the extent of damage to their existing premises or when it would be possible to return to the CBD.
This has put the spotlight on commercial leasing arrangements.
Where properties were extensively damaged or destroyed, the position was relatively clear-cut. The lease came to an end and the tenants were able to move on, although some did experience problems with retrieval of their fixtures and chattels where the building was not destroyed.
But tenants in buildings that were not destroyed or extensively damaged were not so lucky. Their leases remained in place, and in most cases they remained responsible for rent and outgoings – even if they were unable to access or occupy their premises because of the cordon, damage to surrounding buildings or unavailability of services. If those tenants relocated to alternative premises outside the CBD, they also faced the expense of alternative premises.
The experience has led to new demands as commercial leases are negotiated or as existing leases are re-negotiated. The extent to which these demands are accommodated depends upon the bargaining strength of the parties, the nature of the premises and the term of the lease.
Some of these factors are peculiar to Christchurch. Others will likely emerge in other areas which have sustained a natural disaster or emergency, or more generally as tenants seek to protect themselves against the risk of extreme weather events.
So what are tenants in New Zealand now looking for in their lease agreements?
- Unsurprisingly, there is a lot of focus on the application of damage and destruction clauses. Tenants want the lease to specify that these will be triggered in circumstances where the tenant’s actual premises may be undamaged or have sustained only minor damage but are uninhabitable because of damage to other parts of the building, to services in the building, or to the landowner’s surrounding land.
- Inclusion in the agreement of specific drop dead dates for the commencement and completion of repair work, with a right to terminate the contract if these dates are not met. The deadlines in which to undertake the repairs tend to get progressively shorter through the term of the lease. Landlords recognise the greater certainty the provisions provide but arguments typically arise as to the appropriate timeframes.
- Compensation for loss of business and relocation costs where the lease provides for the landlord to retake possession of the premises in order to undertake repairs to, or demolition of, the building. Landlords are seeking to provide only an abatement of rent.
- Abatement of rent where access to the premises is denied as a result of causes beyond the building (for example, a cordon or disruption of essential services), with a right of termination if this persists for a specified length of time. The nature and extent of insurance held by the landlord and the tenant is particularly relevant in these negotiations. Arguments arise as to the appropriate periods.
- Insurance premiums and excesses are likely to increase significantly in New Zealand as a result of the Christchurch earthquakes. Tenants are nervous about increased costs being recovered under operational expenditure (OPEX) and outgoings and are seeking to limit exposure. Landlords are refusing to cap or limit recoveries under OPEX or outgoings.
Seismic risk has become a bigger issue throughout New Zealand as a result of the Canterbury quakes. This has fed into lease negotiations with landlords seeking clauses to provide for access and rights to undertake earthquake strengthening and tenants seeking to limit any disruption resulting from such works. Tenants are also looking to limit the amount of any contribution to those works that may be payable as an improvements rental.